17 January 2023 |

Fraud Is On the Rise: 4 Steps to Stop the Cycle


Rising fraud in fintech is taking away from the industry’s mission of financial inclusivity

Every dollar spent or team dedicated to combatting fraud could mean fewer resources devoted to product enhancements and innovation. 

Especially if a company constantly puts out fraud fires instead of deciding to get to the root of identifying problems.

But it doesn’t have to be this way. 

When it comes to the growing issue of fraud every company experiences, the need to be proactive instead of reactive is critical

And the more you learn, the less you fear.

Style Hair Flip GIF by Ariana Grande

The numbers, told in Alloy’s annual State of Fraud report, tell a scary story

  • 27% of Respondents Lost Over $1M to Fraud
  • 70% of Respondents Lost Over $500K to Fraud 
  • 91% of Respondents Experienced an Increase in Fraud 
  • 71% of Respondents Increased Spending on Fraud Prevention

But the impact of fraud in the fintech industry goes beyond the immediate financial losses for companies. 

Fraud can create a climate of mistrust and insecurity, making it difficult for people to access even basic financial services. 

This can negatively impact those who are already underserved or disadvantaged and further widen the wealth gaps in society. 

Fintech companies must foster a culture of trust and transparency to make financial services more accessible and inclusive. 

But even the biggest bank, like JPMorgan Chase, can be duped into a $175 million acquisition for a platform where the company’s founder reportedly created nearly 4 million fake customer accounts. 

2023 State of Fraud

As our digital world gets more creative, so does fraud. Ten years ago, bad actors typically used fraudulent accounts to fund someone’s luxurious lifestyle. Thus, fraud was essentially static. 

That’s changed today as fraudulent money is being reinvested to make more and better fraud, causing the increase we see today. 

It’s like a startup attitude but in an unfavorable direction instead of something that fintech works hard to accomplish: creating a fair financial system that meets everyone’s needs.

We want to reach our goal of financial inclusion, but with the depletion of $500,000 or $1 million allocated to criminal activities, we are going backward.

Fintech companies are working to improve. However, two-thirds of Alloy’s survey participants had more than half of their employees working on fraud-related activities, which means all of that energy is going into trying to stop losses rather than making enhancements or introducing innovative financial products to the market.

So how do we become proactive? 

I caught up with Parilee Wang, Head of Product at Alloy, to better understand what fintech founders can do to keep their companies safe. 

Step 1

Keep synthetic fraud (when someone uses a combination of real and fake personal information to create an identity and commit fraud) top of mind.

No fintech is too small, and no digital account opening platform is too early to see those attacks – they will come in as quickly as there is a vulnerability. 

According to Alloy’s report, 24% of financial institutions are most concerned about synthetic fraud, which is also expected to increase because of the continued digitization of payments.

The good news is that many different providers in this arena are working to keep identities safe and make fraud prevention investments ROI positive like Alloy, Mitek, and Persona

Step 2 

Ensure you are defining fraud correctly (this may take extra effort to educate yourself and your teams). 

Alloy’s report shows 62% of financial institutions define first-party fraud as the most prevalent (i.e., someone using their own identity to defraud the institution). 

High transaction velocity is the most commonly reported indicator of fraud in general. 

So if we thought that first-party fraud was the cause of high-velocity spikes, that would mean somebody is out there using their identity to overdraw their bank accounts. 

And that’s happening at any institution by thousands of different individuals on any given day. 

That’s hard to believe, says Parilee. First, it’s unlikely that many lone wolves out there have mobilized at that scale. 

What we think as we look at the data, and as we look across our clients, especially with high transaction velocity, is that it’s a vast mix of different fraud types,” Parilee said.  

And that that can often get mislabeled, or it’s just so complicated folks choose to bucket it in a certain way as a default because they don’t know what’s happening.”

This mislabeling is fair. The complexities of fraud and understanding what exactly is happening when you’re being defrauded as a financial institution can be clouded with confusion or simply wanting the problem to go away

But fraud is a constant problem that can’t just go away. So we have to continuously be creative in combating fraud. 

And the only way to actually stop it is by correctly identifying what’s happening.

That’s how to get to the root of the problem.

But, unfortunately, if you’re looking for ways to place a bandaid over the fraud situation, you’ll keep perpetuating a cycle of reacting to the problem instead of identifying it to keep pace with the ever-changing faces of fraud. 

Plus, you’re going to be cutting out a lot of good customers too. 

Step 3

Customers’ bar for intuitive digital experiences is only getting higher

At the same time, fraud is increasing daily, and it’s getting riskier.

So how do you match that customer expectation without opening yourselves up to too much risk?

If you’re taking blunt instruments to solve the problem, and you don’t have a detailed understanding and an exact approach, you’re sacrificing either user experience or fraud prevention.  

Fintech leaders need to get beneath the surface and get precise and deeply understand what’s happening in that particular situation and the nuances of what’s going on. 

You need to be surgical to create all the safety you need while still delivering the seamless customer experiences you want to be making and empowering your users. 

Step 4

A significant key to stopping fraud is collaboration.

The good guys in the ecosystem must work together to get surgical in your diagnosis of fraud. But, unfortunately, the bad guys collaborate on the dark web daily. 

We’ve got to collaborate equally in stopping that bad behavior. 

An isolated mentality doesn’t set you up for collaboration. 

If the bad guys collaborate and the good guys aren’t, that’s not a recipe for success.

So remember that even when we take a loss – when we invest in collaborating with our fintech community, we’ll never lose.